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Strategic sourcing and procurement in engineering and construction

A path to high performance and sustained cost efficiency.

Overview

Construction is again on the rise and revenues from commercial, residential, public sector and infrastructure projects are growing again. The global construction industry has projected increases in capital expenditure on new development and purchases in this segment. However, engineering and construction (E&C) firms face new demands and heightened expectations to improve margins/shareholder returns and improve operations, all in an environment where project complexity is increasing. These new demands are in addition to the constant pressure to deliver projects on time and on budget.

One way E&C firms can get their own houses in shape is to closely examine their supply networks and procurement operations, with the objectives of optimizing costs and streamlining operations, both of which would improve their competitive position.

Background

The engineering and construction sector continues to change in
significant ways, placing renewed pressure on profitability. There is ever increasing margin pressure as infrastructure owners take on larger and more complex projects. Additionally, where competition was once contained to local and regional markets, consolidation and the globalization of E&C firms are bringing larger and financially stronger competitors into the bid room.

With the growing development in this area along with added pressure, those is the industry have identified now as just the right time for E&C firms to focus on direct procurement, identify the barriers that traditionally stymied efforts to optimize enterprise-wide procurement, and propose solutions to overcome these challenges, including the benefits of partnering with third party procurement experts to expand capabilities.

Key Findings

Those in Finance and Procurement at these firms must combat several barriers to enterprise-wide procurement improvement, including:

Preconceived role limitations. Many members of the procurement team view their role as getting quotes/estimates from suppliers, perhaps in a limited number of categories or for a limited number of projects.

Inability to leverage scale through suppliers. Price leverage resulting from consolidation of enterprise-wide purchases in a category can benefit all stakeholders—the E&C firms themselves to subcontractors and suppliers.

Limited integration of and visibility into current supplier data. At many firms there are no resources dedicated to obtaining or synthesizing data on forward looking demand, trends in commodity prices, or suppliers.

Lack of centralized information and analysis. Most firms operate on a decentralized basis—at least as it pertains to procuring materials and hiring subcontractors.

Recommendations

It is tough to ignore the savings possible by improving procurement operations; to do so means profits are left on the table. Our work demonstrates that cost optimization and substantial improvements in procurement efficiencies are possible for E&C firms in a broad range of indirect and direct procurement categories. Yet, to make procurement organizations high performing, the support of suppliers is required, which many E&C firms overlook on the assumption that suppliers will revolt.

Our experience proves that the opposite response is more likely: Large national suppliers, in particular, are highly motivated to participate in procurement transformation because they want a bigger share of wallet currently taken by small, local focused businesses. More volume allows them to leverage their supply chains most effectively. In that way, procurement improvement initiatives started within E&C firms will have a multiplicative, ripple effect throughout the supply network. Given the potential win-win for E&C firms and their suppliers, there is no reason to delay the journey towards procurement optimization.​

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